RECEIVABLES MANAGEMENT AN OVERVIEW
by :Neha chopra MBA IInd sem. IMS
Definition of 'Receivables
Receivables are recorded as an asset by the company because it expects to receive payment for the outstanding amounts soon. Long-term receivables, which do not come due for a significant length of time, are recorded as long-term assets on the balance sheet; most short-term receivables are considered part of a company's current assets.
Meaning of Receivable Management
Credit is the soul of business according to this axiom and to survive in a competitive environment, each and every firm adopts the policy of selling goods, on credit. Receivables are a direct result of credit sales which ultimately increase the profit earned by the firm. Credit sale also result in blocking of more funds in receivables that involves extra cost in term of interest. Moreover, increase in receivables step up the bad debts. Thus receivables involves some cost (interest and bad debts) as well as benefits (increases in profits due to credit sales) to the firm. This is, known as Receivables Management. Receivable Management may therefore, be defined as the process of making decisions relating to the investments of funds in this assets as part of short term operating process.
Objectives of Receivables Management
The objective of receivables management like other assets is to maximise the return on investment in receivables or to maximise the sales to the extent the risk involved remains within the acceptable limits. To accomplish this objective, it is necessary to :a). Achieve optimum (not maximum) volume of sales; b). Control and minimize the cost of credit; c).Maintain optimum level of investment in receivables
Factors affecting investment in Receivables
1) 2) 3) 4) 5) Level of sales Nature and condition of business Credit policy of the firm The terms of credit Capability of credit department
Scope of Receivable Management
The scope of Receivables Management is very wide. It must, therefore be attempt by adopting a systematic approach and considering the various aspect of Receivables Management which are presented in the chart
Scope of Receivables Management
Formulation of credit policy
Credit Evaluation
Credit Control
Credit standard
Collection policy
Collection of information
Credit Decisions Formulation of collection procedure
Monitoring and controlling
Credit Limits
Credit Analysis
Formulation of credit policy: Credit policy refers to the
application of those factors which influence the amount of trade credit i.e. Investment in receivables. Credit policy may be defined as the set of parameters and principles that govern the extension of credit to the customers. These parameters also known as components of credit policy, are: 1). Credit Standards These are the basis criteria for the extension of credit to customer. The choice of optimum standards involves a trade-off between incremental return and cost. 2). Credit Terms These refer to the set of the stipulation or condition under which the credit extended to the customer. These relate to the payment of goods sold.
3). Collection Policy It refers to the procedure adopted by a firm to collect payment due on past account
Credit Evaluation:
The objective of such evaluation is to select those customer who satisfy the pre-determined norms of credit. The following steps are involved in this process: 1). Collection of information 2). Credit analysis The evaluation of the borrowing capacity of the applicant and the promptness and repaying ability of a customer accroding to the terms of contract. the well known five cs of credit i.e. Character capacity, capital, collateral and conditions provide a framework for the evaluation of a customer.
3).Credit decision or credit limit A line of credit is the maximum amount of credit which can be extended by the firm at a given period. the line of credit can be fixed on the basis of customers normal buying trend and the regularity in payment
Control of Receivable The main purpose of controlling receivables is to ensure that the credit policies laid down and adopted are being adhered to. To control the receivables efforts are required in the following two direction 1). Formulation of collection procedure 2). Monitoring and controlling receivables
